Asia Equity Insights Quarterly: Playing defence, bank on “Best in Class”

Equity Strategy Pan Asia  While the debate about the timing of US interest rate increases continues, we think nervousness surrounding the RMB is a bigger risk for Asian equities. It means that a new transmission mechanism has now been established between future volatility in the Chinese economy and Asian equities; PEs need to fall to price in this eventuality. This, together with the absence of clear signs of a recovery in Chinese growth, means that Asian equities continue to struggle. China is now more defensive than India. Given low valuations, especially in China, there is an upside risk that signs of stabilization in growth in China could lead to a sharp reversal in fortunes, particularly if Beijing’s policy response shows more urgency in the coming quarters. Our message is simple – don’t ignore Chinese equities. India is where growth is likely to be the highest in Asia in 2015. But earnings growth expectations are on the decline, and rates have already been cut. The reality of India’s federal system and the power this gives to the states means that the pace of reform is slow. Equity valuations are high, and we are reluctant to pay any premium linked to reform. However, consensus remains firmly overweight India. We wonder how long this might last. Value elsewhere. In North Asia, we prefer Taiwan to Korea for two reasons: (1) Taiwan’s tech companies offer better growth prospects; and (2) Taiwan trades at a deeper discount, offering better relative value than Korea. In ASEAN, valuations are low and earnings downgrades are starting to bottom but currency weakness remains a key risk. What to buy in a sell-off? Given this difficult environment, we stick to our focus on “Asia Best in Class” companies that have what it takes, in our view, to generate sustainable high returns over the medium term. We also focus on themes that can play out slowly over the long run. Examples include new energy, industry changes, financial inclusion and lower interest rates. How these themes can be linked to individual stocks and a portfolio is presented in Asia Super Ten: An equity portfolio reflecting our best ideas in Asia, also published today. Fourth Quarter 2015 Equity weightings Market Current Previous China overweight overweight Korea neutral neutral Taiwan overweight overweight Hong Kong underweight underweight India underweight underweight Singapore overweight overweight Malaysia underweight underweight Indonesia neutral neutral Thailand underweight underweight Philippines neutral neutral Sector Financials overweight overweight Technology underweight neutral Cons Discr underweight underweight Industrials neutral neutral Telecom overweight neutral Energy neutral overweight Cons Staples neutral neutral Materials underweight neutral Utilities overweight overweight Healthcare neutral underweight Source: HSBC Herald van der Linde*, CFA Head of Equity Strategy, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6575 heraldvanderlinde@hsbc.com.hk Devendra Joshi* Equity Strategist, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6592 devendrajoshi@hsbc.com.hk Anurag Dayal*, CFA Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Asia Equity Insights QuarterlyPlaying defence, bank on “Best in Class”  Asian equities will struggle as long as there are no signs of a recovery in earnings growth in China  However, low valuations make us favour China over India, a market where consensus remains overweight. We see some value emerging in ASEAN  We use themes less sensitive to macro factors to select “Best in Class” companies to build equity portfolios Asia Equity Insights Quarterly Pan Asia Fourth Quarter 2015 2 abcOverview, by country Country ChinaKorea TaiwanHong KongIndiaSi